Despite lines out the door, COVID-19 has left Minnesota hospitals in crisis. Why is that?

Critics say the industry was too focused on specialized services and unable to pivot. MHA head Dr. Rahul Koranne says staffing is thin, margins are low and legislative support is needed for the lifting of barriers and bureaucracy.

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ROCHESTER — As some of the largest employers in their communities — and home to some of the best-paying jobs in the largest sector of the economy — Minnesota's hospitals were seemingly well-situated to flourish under the stress test of COVID-19.

When the COVID-19 pandemic arrived two years ago next month, the state's 143 hospitals took up their position at the center of that crisis, becoming a hub of purposeful work while all economic activity around them ground to a halt.

And yet two years into the pandemic, COVID-19 has left the hospitals hurting. Spokespersons describe industry finances as "fragile," with workforce problems that are systemic and potentially long-lasting.

While Mayo Clinic recently reported a financial surplus comparable to pre-pandemic levels, statewide, the industry is said to be feeling the squeeze of converging labor and financial pressures.

"I would say that Minnesotans should know that the hospitals in their local communities, all of them, be it the Metro, Rochester, St. Cloud, Duluth or the Twin Cities — International Falls, Bemidji, Hallock — they're in crisis," says Dr. Rahul Koranne, president and CEO of the Minnesota Hospital Association.


"That's what we're trying to communicate to our lawmakers in the state during this session, and to our congressional delegation."

Koranne says this crisis in the state's hospitals is twofold.

"One is the workforce, and that is going to stay with us for 10-15 years even if we put our head down and start to do something about it," he says. "The other is the very fragile financial state of hospitals and health care systems across the state."

Median, industry-wide operating margins — the amount of profit a hospital turns from its revenue minus its expenses — had already been dropping, according to the latest Minnesota Hospitals Association financial report issued in April of last year, from 2% in 2017, to 1.4% in 2019.

"That was before the first case of COVID was confirmed in Minnesota on March 6 of 2020," Koranne says. "When we counted up the losses in the first three months of the pandemic, we found that hospital systems lost $2.9 billion...compared to the period a year before."

Nationally, the hospital industry is “still performing well below 2019,” according to a recent analysis by the management consulting firm Kaufman Hall. Its latest report suggested the omicron surge put hospital margins in the negative for January .

Lots of new patients, but dwindling finances. What happened?

Few would deny the stress on staff of treating over 60,000 Minnesotans hospitalized with a novel virus capable of attacking all systems of the body. According to the Minnesota Department of Health, these admissions included 11,000 patients in the ICU, and often for months at a time.


As Koranne says, this crisis was invigorating, until it wasn't.

"I call it an ultra marathon," he says. "The first 6 months were kind of fun, with adrenaline flowing, (but) the last year and a half has been draining. It's no fun when your adrenaline is spent and the treadmill just keeps speeding up and up."

However real that exhaustion, treating patients is a hospital's business, and more business usually means more growth.

In this way, both of the industry's current problems — low staffing and thin bank accounts — seem to defy the logic of the market. It's confusing enough to ask — what happened?

"The Covid-19 pandemic has exposed severe shortcomings in hospital financing," is how a pair of business professors described the problem last summer in the The Harvard Business Review.

The authors noted how, "even when filled to capacity, a number of hospitals suffered severe revenue losses. In no well-working market," they wrote, "should demand exceed supply while revenue falls."

"It is perhaps because of our payment system," says coauthor Regina Herzlinger, professor at the Harvard Business School. "It makes it very lucrative to perform surgeries, and does not make it very lucrative to perform medical care, meaning nonsurgical care."

"So (over time) these hospitals (had) skinnied down towards the number of beds that were required for this more profitable line of business. I don't mean to imply any malice or lack of good will toward their patients," she adds, "but economic reality is economic reality."


Industry figures bear this out.

As of 2014, one third of hospital revenue arose from elective admissions, according to findings from the Agency for Healthcare Research and Quality described in the Journal of the American Medical Association. That article called "elective procedures, especially orthopedic and cardiac surgical procedures...among the most profitable services for hospitals."

Staff-wise, the system is designed for its elective procedures model. According to the Kaiser Family Foundation, the U.S. has the least number of doctors per capita than any comparable country except Japan, and yet the highest percentage of specialists at 88%.

Hospitals have gotten more bloated over time as well, with administrators said to have created "a substantial, and growing, cost of nonclinical worker wages to the US healthcare system," according to a 2018 study in journal Clinical Orthopedics and Related Research.

Finally, both the Organization for Economic Cooperation and Development and a 2020 KFF analysis chart a steady decline in beds, from 9 per 1000 U.S. residents in 1960, to 5 in 1989, to 2.8 staffed hospital beds per 1000 Americans in 2020.

That's almost one-third of the 7.8 hospital beds per thousand residents found in Japan.

"It's all mission work to me."

Koranne, a geriatrician and native of India who once worked in the state's smallest community-access hospital in tiny Starbuck, Minnesota after residency in a sprawling King's County hospital in Brooklyn, New York, says at its core, the nature of hospital work remains true to first principles as called upon by COVID-19.

Dr. Rahul Koranne once worked for the smallest community hospital in Minnesota. Today he is the President and CEO of the Minnesota Hospitals Association.
Contributed photo.

"It's all mission work to me," he says. "That's how it has felt in the trenches. You drop everything when the patient needs you, and you go with the flow in serving the patient in front of you. That's the magic of this industry."

But the head of the state's hospital association says that such mission work was greeted with declining reimbursements and rising costs long before COVID-19 arrived, and that COVID-19 only wore away at these pressures.

Today Koranne cites a nationwide survey showing that one in five health care workers left their jobs during the pandemic, as well as a December 2021 report from the state Department of Employment and Economic Development entitled "Critical Condition: the Health Care Workforce in Minnesota."

That document reports that the healthcare system in Minnesota currently posts 40,000 unfilled jobs, including 6,000 vacancies for CNAs, almost 4,800 for RNs, 2,400 for LPNs, 860 for Medical Assistants, and about 700 for skilled lab workers.

But Minnesota's hospitals appear to have restocked towards their previous staffing levels. Though the state's hospitals employed 118,255 people in March of 2020, according to DEED, those levels are back to 95% of what they were, with 112,388 workers as of December 2021.

Some metrics suggest the state's hospitals may be less than tenuous financially, moreover.

Though profit from medical services has fallen, hospitals receive tax-deductible donations and investment income, enough that, as MHA reporting shows, the sector's so-called net margin has remained largely stable over time, dropping from 3.6% in 2014 to 3.3% in 2019. MHA counters that the smaller operating margin should be treated as "the most recognizable, succinct, bottom line measure."

Koranne says the MHA is focused on bolstering interest in the hospital professions and securing bills to support hero pay — $250 million to give $1,500 each to qualifying front line workers. He is also seeking loan forgiveness and lifting of bureaucratic obstacles tied to overlapping licensing boards.

Harvard's Herzlinger believes that nationwide, the industry's staffing issues could be addressed through better management and better labor relations. She argues that hospitals must be held through their financial reports to a crisis plan for capacity problems, and that financial problems will require payment reform.

Even Mayo Clinic, one of the largest private hospitals in the country, reached 92% capacity in 2021 according to its latest financial report.

"The payment system has to be fixed," she says. "Congress has to come to the realization that making medical care ...low margin puts tremendous stress on hospitals, especially if we expect that this epidemic will be the new normal."

"This virus will be very clever, it will mutate and new viruses may appear because of changing environmental circumstances. So the demand for medical care will again explode, and we will relive this situation over and over again."

"COVID is very much here and with us," Koranne says. "The cumulative effects of COVID are going to be with us in this industry for many decades to come."

Paul John Scott is the health correspondent for NewsMD and the Forum News Service. He is a novelist and was an award winning magazine journalist for 15 years prior to joining the FNS in 2019.
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